United States Securities and Exchange Commission |
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(Mark One) |
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[X] |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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[__] |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Delaware |
74-2081929 |
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722 Burleson Street, Corpus Christi, Texas
78402 |
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(361) 883-5591 |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |
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Yes [ X ] |
No [__] |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): |
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Large Accelerated Filer [__] |
Accelerated Filer [__] |
Non-accelerated Filer [ X ] |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). |
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Yes [__] |
No [ X ] |
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State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. |
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Class |
Shares Outstanding as of October 31, 2007 |
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Table of Contents |
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Page No. |
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Item 1. |
Condensed Consolidated Financial Statements (Unaudited) |
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Condensed Consolidated Statements of Income
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Condensed Consolidated Statements of Comprehensive Income
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Condensed Consolidated Balance Sheets
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Condensed Consolidated Statements of Cash Flows
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Item 2. |
Management's
Discussion and Analysis of Financial Condition |
20 |
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Item 3. |
33 |
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Item 4. |
33 |
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Part II - Other Information |
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Item 1. |
34 |
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Item 1A. |
34 |
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Item 2. |
34 |
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Item 3. |
34 |
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Item 4. |
34 |
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Item 5. |
34 |
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Item 6. |
34 |
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34 |
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Forward Looking Information
Certain portions of this report contain forward-looking statements about the business, financial condition and prospects of the Company. The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including, without limitation, changes in demand for the Company’s products, changes in competition, economic conditions, fluctuations in market price for TiO2 pigments, changes in foreign currency exchange rates, increases in the price of energy and raw materials, such as ilmenite, interest rate fluctuations, changes in the capital markets, changes in tax and other laws and governmental rules and regulations applicable to the Company’s business, and other risks indicated in the Company’s filings with the Securities and Exchange Commission. These risks and uncertainties are beyond the ability of the Company to control, and, in many cases, the Company cannot predict all of the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. The Company assumes no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws. When used in this report, the words “believes,” “estimates,” “plans,” “expects,” “anticipates” and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements.
TOR Minerals International, Inc. and Subsidiaries |
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September 30, |
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December 31, |
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2007 |
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2006 |
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(Unaudited) |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
$ |
739 |
$ |
896 |
Trade accounts receivable, net |
4,793 |
3,593 |
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Inventories, net |
11,168 |
10,949 |
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Other current assets |
921 |
555 |
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Total current assets |
17,621 |
15,993 |
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PROPERTY, PLANT AND EQUIPMENT, net |
20,217 |
20,034 |
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GOODWILL |
2,084 |
1,927 |
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OTHER ASSETS |
50 |
57 |
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$ |
39,972 |
$ |
38,011 |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
$ |
1,628 |
$ |
2,036 |
Accrued expenses |
2,106 |
2,062 |
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Notes payable under lines of credit |
1,403 |
811 |
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Current deferred tax liability |
397 |
401 |
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Current maturities - Capital leases |
74 |
65 |
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Current maturities of long-term debt – Financial Institutions |
605 |
580 |
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Current maturities of long-term debt – Related Parties |
- |
400 |
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Total current liabilities |
6,213 |
6,355 |
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LONG-TERM DEBT, EXCLUDING CURRENT MATURITIES |
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Capital leases |
220 |
254 |
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Long-term debt – Financial Institutions |
3,173 |
2,835 |
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Notes payable under lines of credit |
3,875 |
3,525 |
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DEFERRED TAX LIABILITY |
238 |
213 |
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Total liabilities |
13,719 |
13,182 |
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COMMITMENTS AND CONTINGENCIES |
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SHAREHOLDERS' EQUITY: |
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Series
A 6% convertible preferred stock $.01 par value: |
2 |
2 |
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Common
stock $.25 par value: authorized, 10,000 shares; |
1,964 |
1,960 |
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Additional paid-in capital |
22,834 |
22,652 |
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Accumulated deficit |
(2,359) |
(2,600) |
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Accumulated other comprehensive income: |
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Unrealized gain on derivatives |
3 |
81 |
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Cumulative translation adjustment |
3,809 |
2,734 |
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Total shareholders' equity |
26,253 |
24,829 |
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$ |
39,972 |
$ |
38,011 |
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TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Accounting Policies |
Basis of Presentation and Use of Estimates
The interim financial statements of TOR Minerals International, Inc. and Subsidiaries (the "Company") are unaudited, but include all adjustments which the Company deems necessary for a fair presentation of its financial position and results of operations. All adjustments are of a normal and recurring nature. Results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. All significant accounting policies conform to those previously set forth in the Company's fiscal 2006 Annual Report on Form 10-K.
The consolidated financial statements include the accounts of TOR Minerals International, Inc. and its wholly-owned subsidiaries, TOR Minerals Malaysia, Sdn. Bhd. (TMM) and TOR Processing & Trade BV (TP&T). All significant inter-company transactions are eliminated in the consolidation process.
TMM measures and records its transactions in terms of the local Malaysian currency, the Ringgit, which is also the functional currency. TP&T’s functional currency is the Euro. Results of operations for TMM and TP&T are translated from the designated functional currency to the U.S. dollar using average exchange rates during the period, while assets and liabilities are translated at the exchange rate in effect at the reporting date. Resulting gains or losses from translating foreign currency financial statements are reported as other comprehensive income. The effect of changes in exchange rates between the designated functional currency and the currency in which a transaction is denominated are recorded as foreign currency transaction gains (losses) in earnings.
In preparing the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reporting period. Actual results could differ from these estimates.
Income Tax
Due to the utilization of operating loss carry-forwards, the Company recorded U.S. tax expense of $9,000 during the third quarter 2007 and a foreign income tax benefit of $24,000 compared to a foreign income tax benefit of $14,000 for the third quarter 2006. For the nine month period ended September 30, 2007, the Company recorded U.S. tax expense of $27,000 and foreign income tax benefit of $10,000 compared to $10,000 and $114,000 for the same period 2006, respectively. Taxes are applied based on an estimated annualized consolidated effective rate of 6%, which assumes continued ability to offset U.S. federal income taxes through the utilization of net operating loss carry-forwards.
In May 2006, the State of Texas enacted a new business tax that is imposed on gross revenues to replace the State’s current franchise tax regime. The new legislation’s effective date is January 1, 2008, which means that our first Texas margins tax (“TMT”) return will not become due until May 15, 2008 and will be based on our 2007 operations. Although the TMT is imposed on an entity’s gross revenues rather than on its net income, certain aspects of the tax make it similar to an income tax. In accordance with the guidance provided in SFAS No. 109, we have properly determined the impact of the newly-enacted legislation in the determination of our reported state current and deferred income tax liability.
TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Accounting for Uncertainty in Income Taxes
We adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”), effective January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s consolidated financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. It prescribes a recognition threshold and measurement attribute for consolidated financial statement disclosure of tax positions taken or expected to be taken on a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
In accordance with the requirements of FIN 48, we evaluated all tax years still subject to potential audit under the applicable state, federal and foreign income tax laws. As of January 1, 2007, the Company did not have any unrecognized tax benefits and there was no change during the nine month period ended September 30, 2007.
We did not recognize any interest and penalties in our consolidated financial statements as a result of the adoption of FIN 48. If any interest or penalties related to any income tax liabilities are imposed in future reporting periods, we expect to record both of these items as components of income tax expense.
We are subject to taxation in the United States, Malaysia and The Netherlands. Our federal income tax returns in the United States are subject to examination for the tax years ended December 31, 2003 through December 31, 2006. Our state returns, which are filed in Texas and Michigan, are subject to examination for the tax years ended December 31, 2002 through December 31, 2006. Our tax returns in various non-US jurisdictions are subject to examination for various tax years ended December 31, 2000 through December 31, 2006.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. We do not believe the adoption of SFAS 157 will have a material impact on our consolidated financial position or results of operations.
On February 15, 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. This option is available to all entities, including not-for-profit organizations. Most of the provisions in Statement 159 are elective; however, the amendment to FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. Some requirements apply differently to entities that do not report net income. The FASB's stated objective in issuing this standard is as follows: "to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions."
The fair value option established by Statement 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. A not-for-profit organization will report unrealized gains and losses in its statement of activities or similar statement. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments.
Statement 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year. However, in order for a company to early adopt Statement 159, it must also early adopt all of the provisions of FASB Statement No. 157, Fair Value Measurements. We do not believe the adoption of SFAS 159 will have a material impact on our consolidated financial position, cash flows or results of operations.
TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 2. |
Related Party Transactions |
The Company entered into a loan and security agreement on December 12, 2003, with the Company’s Chairman of the Board, Bernard Paulson, a 15.9% shareholder, through Paulson Ranch, Ltd. Under the Agreement, Paulson Ranch made a loan to us in the amount $500,000 with a variable interest rate of 4% per annum above the “Wall Street Journal Prime Rate”. The loan proceeds were used for working capital. The Company paid the outstanding principal balance of $400,000 and accrued interest to Paulson Ranch, Ltd., on March 15, 2007.
Note 3. |
Long-Term Debt and Notes Payable |
A summary of long-term debt and notes payable follows:
(In thousands) |
September 30, |
December 31, |
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2007 |
2006 |
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Note payable to Paulson Ranch, a related party, paid off on March 15, 2007. |
$ |
- |
$ |
400 |
Fixed rate term note payable to a U.S. bank, paid off on May 1, 2007. |
- |
100 |
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Term note payable to a U.S. bank, with an interest rate of 8.25% at September 30, 2007, due November 30, 2010. |
759 |
870 |
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Term note payable to a U.S. bank, with an interest rate of 8.25% at September 30, 2007, due May 1, 2012. |
467 |
- |
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Fixed rate term Euro note payable to a Netherlands bank, with an interest rate of 5.5% at September 30, 2007, due June 1, 2009. (237 Euro) |
338 |
446 |
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Fixed rate term Euro note payable to a Netherlands bank, with an interest rate of 5.2% at September 30, 2007, due July 1, 2029. (425 Euro) |
607 |
580 |
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Fixed rate term Euro note payable to a Netherlands bank, with an interest rate of 4.7% at September 30, 2007, due January 31, 2030. (421 Euro) |
602 |
575 |
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Fixed rate term Euro note payable to a Netherlands bank, with an interest rate of 6.1% at September 30, 2007, due July 31, 2015. (396 Euro) |
565 |
572 |
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U.S. Dollar term note payable to a Malaysian bank, with an interest rate of 6.5% at September 30, 2007, due September 30, 2010. |
440 |
272 |
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Revolving line of credit, payable to a U.S. bank, with an interest rate of bank prime, 7.75% at September 30, 2007, due October 1, 2008. |
3,875 |
3,525 |
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Total |
7,653 |
7,340 |
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Less current maturities |
605 |
980 |
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Total long-term debt and notes payable |
$ |
7,048 |
$ |
6,360 |
The majority of the Company's debt is either floating rate or has been recently negotiated and the carrying values approximate fair value.
TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
U.S. Bank Credit Facility and Term Loans
We amended and restated our previous loan agreement with Bank of America, N.A. (the “Bank”) on November 29, 2006. Under the amendment, the Bank extended the maturity date on our Line of Credit (the “Line”) from October 1, 2007 to October 1, 2008. The Line, which provides us with a $5,000,000 revolving line of credit subject to a defined borrowing base, is secured by our U.S. property, plant and equipment, as well as inventory and accounts receivable. The Bank has also agreed to issue standby letters of credit for our account up to the amount available under the Line. At September 30, 2007, the outstanding balance on the Line was $3,875,000 and we had $750,000 available on that date based on eligible accounts receivable and inventory borrowing limitations.
On February 28, 2007, we amended our current loan agreement with the Bank. Under the terms of the amendment, the Bank revised the basis for determining the “Borrowing Base” and “Eligible Inventory” to the following: “Borrowing Base” means the sum of 80% of Borrower’s Eligible Accounts Receivable plus the lesser of (x) 50% of Borrower’s Eligible Inventory or (y) $3,500,000. “Eligible Inventory” for purposes of determining the borrowing base under the Company’s line of credit with the Bank was amended. The effect of the amendment expands the definition of Eligible Inventory to now permit Synthetic Rutile to be included in the borrowing base for ascertaining the amount of permitted borrowings by the Company, provided that it has been purchased by the Company and is in transit from TOR Minerals Malaysia, a wholly-owned subsidiary of the Company, to the Company’s facility at Corpus Christi, Texas, is fully insured on terms acceptable to the lender and is evidenced by bills of lading and other documents acceptable to the Bank. The value of all Qualified Synthetic Rutile shall not exceed $3,000,000 for purposes of this calculation.
Our existing fixed rate term loan with the Bank, which had an outstanding principal balance of $100,000 at December 31, 2006, was paid off on May 1, 2007.
On December 13, 2005, we entered into a real estate term loan (the “Loan”) with the Bank in the amount of $1,029,000. The Loan is secured by our U.S. real estate and leasehold improvements. Interest, which is a rate equal to the Bank’s Prime Rate (currently 8.25%), is due and payable monthly. The monthly principal and interest payments commenced on December 30, 2005, and will continue through November 30, 2010 at which time the “final payment” of $294,000 is due. The monthly principal payment is $12,250. The Loan balance at September 30, 2007, was $759,000.
On May 7, 2007, we amended our current loan agreement with the Bank. Under the terms of the fourth amendment, we entered into a term loan (the “Term Loan”) with the bank in the amount of $500,000 which is secured by our U.S. property, plant and equipment, as well as inventory and accounts receivable. Interest, which is a rate equal to the Bank’s Prime Rate (currently 8.25%), is due and payable monthly. The monthly principal and interest payments commenced on June 1, 2007, and will continue through May 1, 2012. The monthly principal payment is $8,333.33. The Term Loan balance at September 30, 2007, was $467,000.
In addition, the fourth amendment changed the existing covenant requiring the Company to maintain a positive net income after tax on a rolling four quarter basis to the following: “Beginning January 1, 2007, Borrower agrees that it will maintain a positive net income after taxes, on a consolidated basis, including foreign subsidiaries and properties and excluding only events resulting from required changes in GAAP accounting treatment of intangibles or similar events beyond the control of the Borrower, when determined for the following periods: (i) the three-month period ending March 31, 2007; (ii) the six-month period ending June 30, 2007; (iii) the nine-month period ending September 30, 2007, and (iv) the twelve-month period ending December 31, 2007, and as of each March 31, June 30, September 30, and December 31, thereafter, for the preceding twelve-month period ended on such date.” The effect of this amendment is to exclude the impact of the loss experienced by the Company in the fourth quarter of 2006 from the determination of the positive net income.
TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The Agreement contains covenants that, among other things, require the maintenance of financial ratios based on our consolidated results of operations. The Agreement also requires us to notify the Bank upon the occurrence of a “material adverse event”, which among other items, is considered to be an event that may adversely affect our consolidated financial condition, business, properties, operations, the Bank’s collateral or the Bank’s ability to enforce its rights under the Agreement.
As noted above, the Agreement contains covenants that, among other things, require maintenance of certain financial ratios based on the results of the consolidated operations. The covenants, which are calculated at the end of each quarter, are as follows:
As of and for the four quarters ended September 30, 2007, we were in compliance with all financial ratios contained in the Agreement and expect to be in compliance for a period of twelve-months beyond September 30, 2007.
TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Netherlands Bank Credit Facility, Mortgage and Term Loan
On March 20, 2007, our subsidiary, TP&T, entered into a new short-term credit facility (“Credit Facility”) with Rabobank which replaced the existing Euro 650,000 short-term credit facility (dated April 2, 2004). Under the terms of the Credit Facility, TP&T’s line of credit increased from Euro 650,000 ($928,000) to Euro 1,100,000 ($1,570,000). The Credit Facility, which has a variable interest rate of Bank prime plus 2.8% (7.55% at September 30, 2007), will mature on December 31, 2009 and is secured by TP&T’s accounts receivable and inventory. At September 30, 2007, TP&T had utilized Euro 983,000 ($1,403,000) of its short-term credit facility.
On April 2, 2004, TP&T entered into a term loan with Rabobank in the amount of Euro 676,000. The proceeds of the term loan were used to reduce TP&T’s credit facility and reduce inter-company payables to the U.S. Operation. The term loan, which is secured by TP&T’s assets, will be repaid over a period of five years with a fixed interest rate until maturity of 5.5%. Monthly principal and interest payments commenced on July 1, 2004, and will continue through June 1, 2009. The monthly principal payment is Euro 11,266 ($16,083). The loan balance at September 30, 2007, was Euro 237,000 ($338,000). Under the terms of the Loan Agreement, the Company has guaranteed the term loan.
On July 7, 2004, TP&T entered into a mortgage loan (the “First Mortgage”) with Rabobank. The First Mortgage, in the amount of Euro 485,000, will be repaid over 25 years with interest fixed at 5.2% per year for the first four years. Thereafter, the rate will change to Rabobank prime plus 1.75%. TP&T utilized Euro 325,000 of the loan to finance the July 14, 2004, purchase of land and an office building, as well as to remodel the office building. The balance of the loan proceeds, Euro 160,000, was used for the expansion of TP&T’s existing building. Monthly principal and interest payments commenced on September 1, 2004, and will continue through July 1, 2029. The monthly principal payment is Euro 1,616 ($2,307). The loan balance at September 30, 2007 was Euro 425,000 ($607,000). The mortgage loan is secured by the land and office building purchased on July 7, 2004.
On January 3, 2005, TP&T entered into a second mortgage loan (the “Second Mortgage”) with Rabobank to fund the acquisition of a 10,000 square foot warehouse with a loading dock that is located adjacent to TP&T’s existing production facility. The Second Mortgage, in the amount of Euro 470,000, will be repaid over 25 years with interest fixed at 4.7% per year for the first five years. Thereafter, the rate will change to Rabobank prime plus 1.75%. Monthly principal and interest payments commenced on February 28, 2005 and will continue through January 31, 2030. The monthly principal payment is Euro 1,566 ($2,236). The mortgage is secured by the land and building purchased by TP&T on January 3, 2005. The loan balance at September 30, 2007 was Euro 421,000 ($602,000).
On July 19, 2005, TP&T entered into a new term loan with Rabobank to fund the completion of its building expansion. The loan, in the amount of Euro 500,000, will be repaid over 10 years with interest fixed at 6.1% per year for the first five years. Thereafter, the rate will change to Rabobank prime plus 1.75%. Monthly principal and interest payments commenced on August 31, 2005 and will continue through July 31, 2015. The monthly principal payment is Euro 4,167 ($5,949). The loan is secured by TP&T’s assets. The loan balance at September 30, 2007 was Euro 396,000 ($565,000).
TP&T’s loan agreements covering both the credit facility and the term loans include subjective acceleration clauses that allow Rabobank to accelerate payment if, in the judgment of the bank, there are adverse changes in our business. We believe that such subjective acceleration clauses are customary in the Netherlands for such borrowings. However, if demand is made by Rabobank, we may require additional debt or equity financing to meet our working capital and operational requirements, or if required, to refinance the demanded indebtedness.
TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Malaysian Bank Credit Facility and Term Loan
On September 14, 2005, the Company’s subsidiary, TMM, amended its banking facility with HSBC Bank Malaysia Berhad (“HSBC”). The amendment increased the Bankers Acceptance from RM 500,000 ($148,000) to RM 3,780,000 ($1,117,000) and added a U.S. Dollar term loan (“USD Loan”) in the amount of $1,000,000 (or RM 3,780,000 Malaysian Ringgits, which ever is less). Funding on the USD Loan will represent 74% of the invoice amount that TMM utilizes in the upgrading of their plant and machinery. If the amount funded is less than $1,000,000 on October 31, 2007 the loan amount will be adjusted to what has been funded.
At September 30, 2007, TMM had drawn down $440,000 on the USD Loan. Monthly interest payments began in December 2005 based on an annual interest rate of 6.5%. Monthly principal payments are scheduled to begin on August 26, 2007 and will continue through June 30, 2010.
TMM renewed its banking facility with HSBC on October 30, 2006, for the purpose of extending the maturity date of the current facility from October 31, 2006, to October 31, 2007. The HSBC facility provides for an overdraft line of credit up to RM 500,000 ($148,000), a bank guarantee of RM 300,000 ($89,000) and an ECR up to RM 8,000,000 ($2,364,000). The ECR, a government supported financing arrangement specifically for exporters, is used by TMM for short-term financing of up to 180 days against customers’ and inter-company shipments.
On October 30, 2006, TMM renewed its banking facility with RHB Bank Berhad (“RHB”) for the purpose of extending the maturity date of the current facilities from October 31, 2006, to October 31, 2007. The RHB facility provides for an overdraft line of credit up to RM 1,000,000 ($295,000) and an ECR up to RM 9,300,000 ($2,748,000). The RHB facility was also amended to include the following:
The banking facilities with both HSBC and RHB bear an interest rate on the overdraft facilities at 1.25% over bank prime and the ECR facilities bear interest at 1.0% above the funding rate stipulated by the Export-Import Bank of Malaysia Berhad. At September 30, 2007, TMM was not utilizing their overdraft or their ECR facilities.
The borrowings under both the HSBC and the RHB short term credit facilities are subject to certain subjective acceleration covenants based on the judgment of the banks and a demand provision that provide that the banks may demand repayment at any time. We believe such a demand provision is customary in Malaysia for such facilities. The loan agreements are secured by TMM’s property, plant and equipment. The credit facilities prohibit TMM from paying dividends and the HSBC facility further prohibits loans to related parties without the prior consent of HSBC.
Liquidity
The terms of the Company’s borrowings contain restrictions and covenants, including covenants based on the performance of the Company, and the failure of the Company to comply with such restrictions and covenants could also adversely affect the Company’s financial position.
Management believes that it has adequate liquidity for the next 12 months and expects to maintain compliance with all financial covenants throughout the next 12 months.
TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 4. |
Capital Lease |
On June 27, 2005, TP&T entered into a financial lease agreement with De Lage Landen Financial Services, BV for equipment related to the production of ALUPREM. The cost of the equipment under the capital lease is included in the balance sheets as property, plant and equipment and was $381,181. Accumulated amortization of the leased equipment at September 30, 2007 was Euro 69,293 ($99,000). Amortization of assets under capital leases is included in depreciation expense. The capital lease is in the amount of Euro 377,351 including interest of Euro 62,113 (implicit interest rate 6.3%) and Euro 238 in executory costs. The lease term is 72 months with equal monthly installments of Euro 5,241 ($7,500). The net present value of the lease at September 30, 2007 was Euro 205,000 ($294,000).
The following table sets forth the minimum future lease payments under this lease as of September 30, 2007:
Year Ending December 31, |
|
Amount |
2007 |
$ |
22 |
2008 |
90 |
|
2009 |
90 |
|
2010 |
90 |
|
2011 |
37 |
|
Total minimum lease payments |
329 |
|
Less: Amount representing executory costs |
- |
|
Net minimum lease payments |
329 |
|
Less: Amount representing interest |
(35) |
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Present value of net minimum lease payments |
294 |
|
Less: Current maturities of capital lease obligations |
(74) |
|
Long-term capital lease obligations |
$ |
220 |
Note 5. |
Series A Convertible Preferred Stock Dividend |
On September 7, 2007, the Company declared a dividend, in the amount of $15,000, or $0.075 per share, for the quarterly period ended September 30, 2007, payable on October 1, 2007, to the holders of record of the Series A Convertible Preferred Stock as of the close of business on September 7, 2007.
TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 6. |
Calculation of Basic and Diluted Earnings per Share |
The following table sets forth the computation of basic and diluted earnings per share:
(in thousands, except per share amounts) |
Three Months |
Nine Months |
||||||
2007 |
|
2006 |
2007 |
|
2006 |
|||
Numerator: |
||||||||
Net Income |
$ |
165 |
$ |
16 |
$ |
286 |
$ |
353 |
Preferred Stock Dividends |
(15) |
(15) |
(45) |
(45) |
||||
Numerator for diluted earnings per share - |
$ |
150 |
$ |
1 |
$ |
241 |
$ |
308 |
Denominator: |
||||||||
Denominator for basic earnings per share - |
7,844 |
7,837 |
7,672 |
7,834 |
||||
Effect of dilutive securities: |
||||||||
Employee stock options |
- |
27 |
57 |
52 |
||||
Dilutive potential common shares |
- |
27 |
57 |
52 |
||||
Denominator for diluted earnings per share - |
7,844 |
7,864 |
7,729 |
7,886 |
||||
Basic earnings per common share |
$ |
0.02 |
$ |
0.00 |
$ |
0.03 |
$ |
0.04 |
Diluted earnings per common share |
$ |
0.02 |
$ |
0.00 |
$ |
0.03 |
$ |
0.04 |
Excluded from the calculation of diluted earnings per share were a total of 168,000 common shares related to the 200,000 convertible preferred shares at September 30, 2007 and 2006. The convertible preferred shares were not included in the computation of diluted earnings per share as the effect would be antidilutive.
Employee stock options excluded from diluted earnings per share for the three month periods ended September 30, 2007 and 2006 were 816,429 and 700,300, respectively. For the nine month periods ended September 30, 2007 and 2006, options excluded from diluted earnings per share were 320,700 and 156,300, respectively. These options were excluded from the computation of diluted earnings per share during these periods because the exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive.
TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 7. |
Segment Information |
The Company and its subsidiaries operate in the business of pigment manufacturing and related products in three geographic segments. All United States manufacturing is done at the facility located in Corpus Christi, Texas. Foreign manufacturing is done by the Company’s wholly-owned subsidiaries, TMM, located in Malaysia and TP&T, located in the Netherlands. A summary of the Company’s manufacturing operations by geographic area is presented below:
(In thousands) |
United States |
Europe |
Asia |
Inter-Company |
Consolidated |
|||||
As of and for the three months ended: |
||||||||||
September 30, 2007 |
||||||||||
Net Sales: |
||||||||||
Customer sales |
$ |
4,989 |
$ |
1,620 |
$ |
949 |
$ |
- |
$ |
7,558 |
Intercompany sales |
- |
506 |
470 |
(976) |
- |
|||||
Total Net Sales |
$ |
4,989 |
$ |
2,126 |
$ |
1,419 |
$ |
(976) |
$ |
7,558 |
Location profit (loss) |
$ |
(21) |
$ |
187 |
$ |
(90) |
$ |
89 |
$ |
165 |
September 30, 2006 |
||||||||||
Net Sales: |
||||||||||
Customer sales |
$ |
4,506 |
$ |
1,176 |
$ |
1,316 |
$ |
- |
$ |
6,998 |
Intercompany sales |
- |
159 |
2,315 |
(2,474) |
- |
|||||
Total Net Sales |
$ |
4,506 |
$ |
1,335 |
$ |
3,631 |
$ |
(2,474) |
$ |
6,998 |
Location profit (loss) |
$ |
73 |
$ |
(184) |
$ |
26 |
$ |
101 |
$ |
16 |
As of and for the nine months ended: |
||||||||||
September 30, 2007 |
||||||||||
Net Sales: |
||||||||||
Customer sales |
$ |
14,790 |
$ |
4,671 |
$ |
2,531 |
$ |
- |
$ |
21,992 |
Intercompany sales |
- |
1,913 |
4,180 |
(6,093) |
- |
|||||
Total Net Sales |
$ |
14,790 |
$ |
6,584 |
$ |
6,711 |
$ |
(6,093) |
$ |
21,992 |
Location profit (loss) |
$ |
(93) |
$ |
393 |
$ |
(198) |
$ |
184 |
$ |
286 |
Location assets |
$ |
13,700 |
$ |
11,681 |
$ |
14,591 |
$ |
- |
$ |
39,972 |
September 30, 2006 |
||||||||||
Net Sales: |
||||||||||
Customer sales |
$ |
14,587 |
$ |
3,422 |
$ |
2,715 |
$ |
- |
$ |
20,724 |
Intercompany sales |
- |
1,191 |
5,715 |
(6,906) |
- |
|||||
Total Net Sales |
$ |
14,587 |
$ |
4,613 |
$ |
8,430 |
$ |
(6,906) |
$ |
20,724 |
Location profit (loss) |
$ |
285 |
$ |
(385) |
$ |
391 |
$ |
62 |
$ |
353 |
Location assets |
$ |
13,200 |
$ |
9,770 |
$ |
13,388 |
$ |
- |
$ |
36,358 |
TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Product sales of inventory between Corpus Christi, TP&T and TMM are based on inter-company pricing, which includes an inter-company profit margin. In the geographic information, the location profit (loss) from all locations is reflective of these inter-company prices, as is inventory at the Corpus Christi location prior to elimination adjustments. Such presentation is consistent with the internal reporting reviewed by the Company’s chief operating decision maker. The elimination entries include an adjustment to the cost of sales resulting from the adjustment to ending inventory to eliminate inter-company profit, and the reversal of a similar adjustment from a prior period. To the extent there are net increases/declines period over period in Corpus Christi inventories that include an inter-company component, the net effect of these adjustments can decrease/increase location profit.
Sales from the subsidiary to the parent company are based upon profit margins which represent competitive pricing of similar products. Intercompany sales consisted of SR, HITOX and ALUPREM.
Note 8. |
Stock Options and Equity Compensation Plan |
The following table provides information as of September 30, 2007, about the Company’s common stock that may be issued upon the exercise of options, warrants and rights under all of the Company’s existing equity compensation plans (including individual arrangements):
Plan Category |
Number of securities to be issued upon exercise of
outstanding options, warrants and rights |
Weighted-average exercise price of outstanding
options, warrants and rights |
Number of securities remaining available for future
issuance under equity compensation plans (excluding securities reflected in
column (a)) |
|||
Equity compensation plans |
816,429 |
$2.704 |
104,482 |
|||
Equity compensation plans
not |
-- |
-- |
||||
Total |
816,429 |
$2.704 |
104,482 |
The Company's 1990 Incentive Stock Option Plan (“ISO”) for TOR Minerals International, Inc. (the "1990 Plan") provided for the award of a variety of incentive compensation arrangements to such employees and directors as may be determined by a Committee of the Board. The ability to issue new options under the 1990 Plan expired in February of 2000, with options to acquire 372,200 shares of common stock still outstanding. At September 30, 2007, the 1990 Plan had 32,200 options outstanding.
On February 21, 2000, the Company's Board of Directors approved the adoption of the 2000 Incentive Stock Option Plan for TOR Minerals International, Inc. (the "Plan"). The Plan provides for the award of a variety of incentive compensation arrangements to such employees and directors as may be determined by a Committee of the Board. The maximum number of shares of the Company's common stock initially authorized to be sold or issued under the Plan was 750,000. At the Annual Shareholders’ meeting on May 14, 2004, the maximum number of shares of the Company’s common stock that may be sold or issued under the Plan was increased 300,000 shares from 750,000 shares to 1,050,000 shares subject to certain adjustments upon recapitalization, stock splits and combinations, merger, stock dividend and similar events. At September 30, 2007, the Plan had 784,229 options outstanding, 161,289 exercised and 104,482 available for future issuance.
TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Both the 1990 Plan and the 2000 Plan provide for the award of a variety of incentive compensation arrangements, including restricted stock awards, performance units or other non-option awards.
For the three month periods ended September 30, 2007 and 2006, the Company recorded $36,000 and a credit of $3,000, respectively, in stock-based employee compensation and for the nine month periods ended September 30, 2007 and 2006, $150,000 and $117,000, respectively. This compensation cost is included in the general and administrative expenses and inventory/cost of sales in the accompanying consolidated income statements.
The Company granted 167,500 and 95,700 options during the nine month periods ended September 30, 2007 and 2006, respectively. The weighted average fair value per option at the date of grant for options granted in the nine month periods ended September 30, 2007 and 2006 was $2.01 and $1.52, respectively, as valued using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
Nine Months Ended September 30, |
|||
|
|
2007 |
|
2006 |
Risk-free interest rate |
4.71% |
4.97% |
||
Expected dividend yield |
0.00% |
0.00% |
||
Expected volatility |
0.74 |
0.74 |
||
Expected term (in years) |
7.00 |
6.69 |
The risk free interest rate is based on the Treasury Constant Maturity Rate as quoted by the Federal Reserve at the time of the grant for a term equivalent to the expected term of the grant. The estimated volatility is based on the historical volatility of our stock and other factors. The expected term of options represents the period of time the options are expected to be outstanding from grant date.
The number of options exercisable at September 30, 2007 and 2006 was 590,409 and 597,410, respectively. The weighted-average remaining contractual life of those options is 6.6 years. Exercise prices on options outstanding at September 30, 2007 and 2006, ranged from $0.92 to $6.11 per share as noted in the following table.
Options Outstanding at September 30, |
||||
2007 |
2006 |
|
Range of Exercise Prices |
|
84,100 |
93,150 |
$ 0.92 - $ 1.99 |
||
589,029 |
548,400 |
$ 2.00 - $ 2.99 |
||
600 |
600 |
$ 3.00 - $ 3.99 |
||
95,500 |
95,500 |
$ 4.00 - $ 4.99 |
||
20,200 |
20,800 |
$ 5.00 - $ 5.99 |
||
27,000 |
27,000 |
$ 6.00 - $ 6.11 |
||
816,429 |
785,450 |
As of September 30, 2007, there was $447,000 of option compensation expense related to non-vested awards which is expected to be recognized over a weighted average period of 3.3 years.
As all options issued under the Plan are Incentive Stock Options, the Company does not receive any excess tax benefits relating to the compensation expense recognized on vested options.
TOR Minerals International, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 9. |
Inventories |
(In thousands) |
September 30, |
|
December 31, |
|
2007 |
|
2006 |
||
Raw materials |
$ |
6,612 |
$ |
6,404 |
Work in progress |
566 |
703 |
||
Finished goods |
3,400 |
3,259 |
||
Supplies |
610 |
583 |
||
Total Inventories |
11,188 |
10,949 |
||
Inventory reserve |
(20) |
- |
||
Net Inventories |
$ |
11,168 |
$ |
10,949 |
10. |
Derivatives and Hedging Activities |
Natural Gas Contract
To protect against the increase in the cost of natural gas used in the manufacturing process, the Company has instituted a natural gas hedging program. The Company hedges portions of its forecasted natural gas purchases with forward contracts. When the price of natural gas increases, its cost is offset by the gains in the value of the forward contracts designated as hedges. Conversely, when the price of natural gas declines, the decrease in the cash flows on natural gas purchases is offset by losses in the value of the forward contract.
On August 31, 2006, the Company entered into a natural gas contract with Bank of America, N.A. to achieve the objectives of the hedging program. The Company designated the contract as a cash flow hedge, with the expectation that it would be highly effective in offsetting the price of natural gas. The contract was settled based on the average closing prices for natural gas from September 26 through September 28, 2006. The Company paid $6.02 per MM/Btu on notional quantities amounting to 15,000 MM/Btu’s. The fair value of the hedge decreased $24,000 from September 30, 2006 to October 1, 2006 due to the settlement of the hedge. The recognition of this loss had no effect on the Company’s consolidated cash flow.
At September 30, 2007, there were no natural gas hedge contracts outstanding.
Foreign Currency Forward Contracts
The purpose of the Company’s foreign currency hedging activities is to protect the Company from the risk that the eventual cash flows resulting from transactions in foreign currencies, including sales and purchases transacted in a currency other than the functional currency, will be adversely affected by changes in exchange rates. The Company has not entered into these contracts for trading or speculative purposes in the past, nor do we currently anticipate entering into such contracts for trading or speculative purposes in the future. Derivatives used to hedge forecasted transactions and specific cash flows associated with foreign currency denominated financial assets and liabilities which meet the criteria for hedge accounting are designated as cash flow hedges. Consequently, the effective portion of gains and losses is deferred as a component of accumulated other comprehensive income and is recognized in earnings at the time the hedged item affects earnings. The Company measures hedge effectiveness by formally assessing, at least quarterly, the historical and probable future high correlation of changes in the fair value or expected future cash flows of the hedged item. The ineffective portions, if any, are recorded in current earnings in the current period. If the hedging relationship ceases to be highly effective or if it becomes probable that an expected transaction will no longer occur, gains or losses on the derivative are recorded in current earnings. If no hedging relationship is designated, the derivative is marked to market through current earnings. For the three and nine month periods ended September 30, 2007, we marked the contracts to market, recording a net gain of approximately $3,000 as a component of "Other Comprehensive Income" and as a current asset on the consolidated balance sheet at September 30, 2007. The recognition of this net gain had no effect on our cash flow.
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2006 (“2006 Annual Report”), the financial statements and related notes in this report, the risk factors in our 2006 Annual Report, and all of the other information contained elsewhere in this report. The terms “we”, “us”, “our”, or “TOR” refer to TOR Minerals International, Inc., and its subsidiaries, unless the context suggests otherwise.
Overview
We are a global specialty chemical company engaged in the business of manufacturing and marketing mineral products for use as pigments, pigment extenders and flame retardants used in the manufacture of paints, industrial coatings, plastics, catalysts and solid surface applications. We have operations in the U.S., Asia and Europe.
Our U.S. Operation, located in Corpus Christi, Texas, manufactures HITOX, BARTEX, and HALTEX. The facility is also the Global Headquarters for the Company. The Asian Operation, located in Ipoh, Malaysia, manufactures SR and HITOX and our European Operation, located in Hattem, Netherlands, manufactures Alumina based products.
Operating expenses in the foreign locations are primarily in local currencies. Accordingly, we have exposure to fluctuation in foreign currency exchange rates. These fluctuations impact the translation of sales, earnings, assets and liabilities from local currency to the U.S. Dollar.
Our business is closely correlated with the construction industry and its demand for materials that use pigments, such as paints and plastics. This has generally led to higher sales in our second and third quarters due to increases in construction and maintenance during warmer weather. Also, pigment consumption is closely correlated with general economic conditions. When the economy is in an expansionary state, there is typically an increase in pigment consumption while a slow down typically results in decreased pigment consumption. When the construction industry or the economy is in a period of decline, TOR's sales and profit are likely to be adversely affected.
Following are our results for the three month and nine month periods ended September 30, 2007 and 2006.
(In thousands, except per share amounts) |
|
Three Months |
|
Nine Months |
||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
NET SALES |
$ |
7,558 |
$ |
6,998 |
$ |
21,992 |
$ |
20,724 |
Cost of sales |
6,082 |
5,760 |
17,739 |
16,392 |
||||
GROSS MARGIN |
|
1,476 |
|
1,238 |
|
4,253 |
|
4,332 |
Technical services and research and development |
65 |
47 |
183 |
185 |
||||
General, administrative and selling expenses |
1,055 |
1,028 |
3,276 |
3,232 |
||||
OPERATING INCOME |
|
356 |
|
163 |
|
794 |
|
915 |
OTHER INCOME (EXPENSE): |
||||||||
Interest income |
8 |
4 |
11 |
15 |
||||
Interest expense |
(179) |
(142) |
(518) |
(399) |
||||
Gain (loss) on foreign currency exchange rate |
(35) |
(23) |
16 |
(54) |
||||
INCOME BEFORE INCOME TAX |
|
150 |
|
2 |
|
303 |
|
477 |
Income tax expense (benefit) |
(15) |
(14) |
17 |
124 |
||||
NET INCOME |
$ |
165 |
$ |
16 |
$ |
286 |
$ |
353 |
|
|
|
|
|
|
|
|
|
Income per diluted common share: |
$ |
0.02 |
$ |
0.00 |
0.03 |
0.04 |
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Going forward, we see 2007 as a building year at TOR and during 2007 we have focused on sales growth in global markets, manufacturing efficiencies and new product development for 2008 and beyond.
We believe our geographic diversity is an advantage to selling in the global markets. While we see relatively flat sales in the U.S. and Asia throughout 2007, we believe our sales growth in Europe will be approximately 30% this year. In addition, we believe that:
Looking to the future, our strategy focuses on pursuing niche markets for paints, plastics, papers and catalysts applications with high value-added products that produce good margin and have high barriers to entry. During the third quarter, we continued to see evidence that this strategy is working. These products have a solid value proposition with our customers and therefore sell at a higher average selling price and produce more attractive gross margins for TOR. In addition, the high value-added nature of these products allows us to create close partnerships with our customers and develop long-term relationships with recurring and predictable revenue streams.
We are also seeing our customer base become more diverse. We have increased sales to existing customers, added several new specialty alumina customers this year all over the world and we are far less dependent on any single customer for our success. At the beginning of the year, we announced that we received a specialty alumina purchase order from a customer that could potentially account for more than 10% of our overall revenue in 2007. The order rate from this customer has not ramped as fast as we anticipated. However, the strengthened diversity of our customer base has allowed us to grow our specialty alumina sales approximately 37% for the year, well ahead of our original plans, which has lessened our dependence on any one major customer.
With the success of our alumina business, we are no longer dependent on one group of products for our success. Our alumina business now accounts for approximately one-third of our overall revenue and is currently the most profitable part of TOR.
As we look at our HITOX business going forward, we expect our traditional HITOX business to remain tied to the strength of the U.S. economy. Our key growth strategy is to introduce newly developed colored pigments that will expand our addressable market and increase our sales potential. We are applying technologies developed in our Netherlands operation to create new high performance fillers and pigments. Unlike our traditional HITOX products, our new products have high performance characteristics, much broader end market applications and provide for value-added premium pricing.
We expect to introduce by the end of the third quarter of 2008 four new colored pigments that are heat and UV stable and are branding these new products under the name TioPrem Gray, Orange, Beige and Brown. In the future we will be able to sell our products in plastics, top coat paint and paper applications which were not previously available to us with our traditional HITOX. We expect these products to greatly expand our addressable market. We believe these products have great potential and should be contributing to our results in the second half of 2008.
Clearly, 2007 has been and continues to be a transitional year for TOR. We feel confident that we have put the right strategies in place that will allow us to grow revenue and improve profitability.
Actual results could differ materially from those indicated by these forward looking statements because of various risks and uncertainties. See the information under the caption “Forward Looking Information” appearing below the Table of Contents of this report.
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Net Sales: Consolidated net sales for the quarter ended September 30, 2007 increased approximately $560,000 compared to the third quarter 2006 primarily due to an increase in volume of our ALUPREM sales in the U.S. and Europe, offset by a decrease in sales volume of HITOX worldwide.
Following is a summary of our consolidated products sales for the three month periods ended September 30, 2007 and 2006 (in thousands):
Three Months Ended September 30, |
|||||||||
Product |
2007 |
2006 |
Variance |
||||||
HITOX |
$ |
3,962 |
53% |
$ |
4,477 |
64% |
$ |
(515) |
-12% |
ALUPREM |
2,301 |
30% |
1,125 |
16% |
1,176 |
105% |
|||
BARTEX |
839 |
11% |
858 |
12% |
(19) |
-2% |
|||
HALTEX |
322 |
4% |
245 |
4% |
77 |
31% |
|||
OTHER |
134 |
2% |
293 |
4% |
(159) |
-54% |
|||
Total |
$ |
7,558 |
100% |
$ |
6,998 |
100% |
$ |
560 |
8% |
Following is a summary of our consolidated products sales for the nine month periods ended September 30, 2007 and 2006 (in thousands):
Nine Months Ended September 30, |
|||||||||
Product |
2007 |
2006 |
Variance |
||||||
HITOX |
$ |
11,599 |
53% |
$ |
12,106 |
58% |
$ |
(507) |
-4% |
ALUPREM |
6,825 |
31% |
4,964 |
24% |
1,861 |
37% |
|||
BARTEX |
2,447 |
11% |
2,351 |
11% |
96 |
4% |
|||
HALTEX |
719 |
3% |
736 |
4% |
(17) |
-2% |
|||
SR |
12 |
0% |
9 |
0% |
3 |
33% |
|||
OTHER |
390 |
2% |
558 |
3% |
(168) |
-30% |
|||
Total |
$ |
21,992 |
100% |
$ |
20,724 |
100% |
$ |
1,268 |
6% |
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Corpus Christi Operation
Following is a summary of net sales for our Corpus Christi operation for the three month periods ended September 30, 2007 and 2006 (in thousands):
Three Months Ended September 30, |
|||||||||
Product |
2007 |
2006 |
Variance |
||||||
HITOX |
$ |
2,860 |
57% |
$ |
3,033 |
67% |
$ |
(173) |
-6% |
ALUPREM |
906 |
18% |
269 |
6% |
637 |
237% |
|||
BARTEX |
839 |
17% |
858 |
19% |
(19) |
-2% |
|||
HALTEX |
322 |
7% |
245 |
6% |
77 |
31% |
|||
OTHER |
62 |
1% |
101 |
2% |
(39) |
-39% |
|||
Total |
$ |
4,989 |
100% |
$ |
4,506 |
100% |
$ |
483 |
11% |
Following is a summary of net sales for our Corpus Christi operation for the nine month periods ended September 30, 2007 and 2006 (in thousands):
Nine Months Ended September 30, |
|||||||||
Product |
2007 |
2006 |
Variance |
||||||
HITOX |
$ |
8,335 |
56% |
$ |
8,701 |
60% |
$ |
(366) |
-4% |
ALUPREM |
3,041 |
21% |
2,436 |
17% |
605 |
25% |
|||
BARTEX |
2,447 |
16% |
2,351 |
16% |
96 |
4% |
|||
HALTEX |
719 |
5% |
736 |
5% |
(17) |
-2% |
|||
OTHER |
248 |
2% |
363 |
2% |
(115) |
-32% |
|||
Total |
$ |
14,790 |
100% |
$ |
14,587 |
100% |
$ |
203 |
1% |
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Netherlands Operation
Our subsidiary in the Netherlands, TP&T, manufactures and sells ALUPREM to third party customers, as well as to our Corpus Christi operation for distribution to our U.S. customers. In addition, TP&T purchases HITOX from TMM for distribution in Europe. Our increased sales efforts in Europe have resulted in an increase in our customer base, as well as our sales volume. The following table represents TP&T’s ALUPREM and HITOX sales (in thousands) for the three month periods ended September 30, 2007 and 2006 to third party customers. All inter-company sales have been eliminated.
Three Months Ended September 30, |
|||||||||
Product |
2007 |
2006 |
Variance |
||||||
ALUPREM |
$ |
1,395 |
86% |
$ |
856 |
73% |
$ |
539 |
63% |
HITOX |
225 |
14% |
320 |
27% |
(95) |
-30% |
|||
Total |
$ |
1,620 |
100% |
$ |
1,176 |
100% |
$ |
444 |
38% |
The following table represents TP&T’s ALUPREM and HITOX sales (in thousands) for the nine month periods ended September 30, 2007 and 2006 to third party customers. All inter-company sales have been eliminated.
Nine Months Ended September 30, |
|||||||||
Product |
2007 |
2006 |
Variance |
||||||
ALUPREM |
3,784 |
81% |
$ |
2,528 |
74% |
1,256 |
50% |
||
HITOX |
$ |
887 |
19% |
894 |
26% |
$ |
(7) |
-1% |
|
Total |
$ |
4,671 |
100% |
$ |
3,422 |
100% |
$ |
1,249 |
36% |
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Malaysian Operation
Our subsidiary in Malaysia, TMM, manufactures and sells HITOX and SR to third party customers, as well as to our Corpus Christi operation and TP&T. The following table represents TMM’s sales (in thousands) for the three month periods ended September 30, 2007 and 2006 to third party customers. All inter-company sales have been eliminated.
Three Months Ended September 30, |
|||||||||
Product |
2007 |
2006 |
Variance |
||||||
HITOX |
$ |
877 |
92% |
$ |
1,124 |
85% |
$ |
(247) |
-22% |
OTHER |
72 |
8% |
192 |
15% |
(120) |
100% |
|||
Total |
$ |
949 |
100% |
$ |
1,316 |
100% |
$ |
(367) |
-28% |
The following table represents TMM’s sales (in thousands) for the nine month periods ended September 30, 2007 and 2006 to third party customers. All inter-company sales have been eliminated.
Nine Months Ended September 30, |
|||||||||
Product |
2007 |
2006 |
Variance |
||||||
HITOX |
$ |
2,377 |
94% |
$ |
2,511 |
93% |
$ |
(134) |
-5% |
SR |
12 |
0% |
9 |
0% |
3 |
33% |
|||
OTHER |
142 |
6% |
195 |
7% |
(53) |
-27% |
|||
Total |
$ |
2,531 |
100% |
$ |
2,715 |
100% |
$ |
(184) |
-7% |
Gross Margin: For the three month and nine month periods ended September 30, 2007, gross margin increased 1.8% and decreased 1.6%, respectively. Primary factors affecting the gross margin include higher fuel oil and raw material costs, as well as reduced fixed cost absorption associated with our Malaysian SR plant. These negative affects have been partially offset by lower energy costs related to our new HITOX production process at the Corpus Christi operation, improved absorption at our European operation and a shift to higher margin specialty alumina product sales in Europe.
Technical Services and General, Administrative and Selling Expenses: For the three month period ended September 30, 2007, technical services and general, administrative and selling expenses increased approximately 4.2% compared to the same period 2006 and 1.2% for the nine month period ended September 30, 2007 compared to 2006. The third quarter increase was primarily the result of product development relating to the Company’s new TioPrem products.
Interest Expense: Net interest expense for the quarter increased approximately $37,000 and $119,000 year to date as compared to the same periods in 2006. The increases are primarily related to an increase in long-term debt and our lines of credit, as well as higher interest rates.
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Income Taxes: We recorded U.S. tax expense of $9,000 during the third quarter 2007 and foreign income tax benefit of $24,000 compared to foreign income tax benefit of $14,000 for the third quarter 2006. For the nine month period ended September 30, 2007, we recorded U.S. tax expense of $27,000 and foreign income tax benefit of $10,000 compared to expense of $10,000 and $114,000 for the same period 2006, respectively. Taxes are applied based on an estimated annualized consolidated effective rate of 6%, which assumes continued ability to offset U.S. federal income taxes through the utilization of net operating loss carry-forwards.
Liquidity, Capital Resources and Other Financial Information
Cash and Cash Equivalents
As noted on the following table, cash and cash equivalents decreased $157,000 from December 31, 2006 to September 30, 2007.
Nine Months Ended |
||||
(In thousands) |
|
2007 |
|
2006 |
Net cash provided by (used in) |
||||
Operating activities |
$ |
(79) |
$ |
(938) |
Investing activities |
(621) |
(599) |
||
Financing activities |
596 |
722 |
||
Effect of exchange rate fluctuations |
(53) |
44 |
||
Net change in cash and cash equivalents |
$ |
(157) |
$ |
(771) |
Operating Activities
We used $79,000 during the first nine months of 2007 in operating activities. Following are the major changes in working capital affecting cash used in operating activities for the nine month period ended September 30, 2007:
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Investing Activities
We used cash of $621,000 in investing activities during the first nine months of 2007 primarily for the purchase of fixed assets. Net investments for each of our three locations are as follows:
Financing Activities
We received $596,000 from financing activities during the nine month period ended September 30, 2007. Significant factors relating to financing activities include the following:
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity
The terms of our borrowings contain restrictions and covenants, including subjective acceleration clauses and demand clauses on our foreign debt and covenants on our U.S. debt based on our performance. Our failure to comply with such restrictions and covenants, or the exercise of subjective acceleration or demand clauses, could adversely affect our financial position. We believe that we have adequate liquidity for the next 12 months and expect to maintain compliance with all financial covenants throughout the next 12 months. Following is a summary of our long-term debt and notes payable:
(In thousands) |
September 30, |
December 31, |
||
2007 |
2006 |
|||
Note payable to Paulson Ranch, a related party, paid off on March 15, 2007. |
$ |
- |
$ |
400 |
Fixed rate term note payable to a U.S. bank, paid off on May 1, 2007. |
- |
100 |
||
Term note payable to a U.S. bank, with an interest rate of 8.25% at September 30, 2007, due November 30, 2010. |
759 |
870 |
||
Term note payable to a U.S. bank, with an interest rate of 8.25% at September 30, 2007, due May 1, 2012. |
467 |
- |
||
Fixed rate term Euro note payable to a Netherlands bank, with an interest rate of 5.5% at September 30, 2007, due June 1, 2009. (237 Euro) |
338 |
446 |
||
Fixed rate term Euro note payable to a Netherlands bank, with an interest rate of 5.2% at September 30, 2007, due July 1, 2029. (425 Euro) |
607 |
580 |
||
Fixed rate term Euro note payable to a Netherlands bank, with an interest rate of 4.7% at September 30, 2007, due January 31, 2030. (421 Euro) |
602 |
575 |
||
Fixed rate term Euro note payable to a Netherlands bank, with an interest rate of 6.1% at September 30, 2007, due July 31, 2015. (396 Euro) |
565 |
572 |
||
U.S. Dollar term note payable to a Malaysian bank, with an interest rate of 6.5% at September 30, 2007, due September 30, 2010. |
440 |
272 |
||
Revolving line of credit, payable to a U.S. bank, with an interest rate of bank prime, 7.75% at September 30, 2007, due October 1, 2008. |
3,875 |
3,525 |
||
Total |
7,653 |
7,340 |
||
Less current maturities |
605 |
980 |
||
Total long-term debt and notes payable |
$ |
7,048 |
$ |
6,360 |
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results
of Operations
U.S. Operations
We amended and restated our previous loan agreement with Bank of America, N.A. (the “Bank”) on November 29, 2006. Under the amendment, the Bank extended the maturity date on our Line of Credit (the “Line”) from October 1, 2007 to October 1, 2008. The Line, which provides us with a $5,000,000 revolving line of credit subject to a defined borrowing base, is secured by our U.S. property, plant and equipment, as well as inventory and accounts receivable. The Bank has also agreed to issue standby letters of credit for our account up to the amount available under the Line. At September 30, 2007, the outstanding balance on the Line was $3,875,000 and we had $750,000 available on that date based on eligible accounts receivable and inventory borrowing limitations.
On February 28, 2007, we amended our current loan agreement with the Bank. Under the terms of the amendment, the Bank revised the basis for determining the “Borrowing Base” and “Eligible Inventory” to the following: “Borrowing Base” means the sum of 80% of Borrower’s Eligible Accounts Receivable plus the lesser of (x) 50% of Borrower’s Eligible Inventory or (y) $3,500,000. “Eligible Inventory” for purposes of determining the borrowing base under the Company’s line of credit with the Bank was amended. The effect of the amendment expands the definition of Eligible Inventory to now permit Synthetic Rutile to be included in the borrowing base for ascertaining the amount of permitted borrowings by the Company, provided that it has been purchased by the Company and is in transit from TOR Minerals Malaysia, a wholly-owned subsidiary of the Company, to the Company’s facility at Corpus Christi, Texas, is fully insured on terms acceptable to the lender and is evidenced by bills of lading and other documents acceptable to the Bank. The value of all Qualified Synthetic Rutile shall not exceed $3,000,000 for purposes of this calculation.
Our existing fixed rate term loan with the Bank, which had an outstanding principal balance of $100,000 at December 31, 2006, was paid off on May 1, 2007.
On December 13, 2005, we entered into a real estate term loan (the “Loan”) with the Bank in the amount of $1,029,000. The Loan is secured by our U.S. real estate and leasehold improvements. Interest, which is a rate equal to the Bank’s Prime Rate (currently 8.25%), is due and payable monthly. The monthly principal and interest payments commenced on December 30, 2005, and will continue through November 30, 2010 at which time the “final payment” of $294,000 is due. The monthly principal payment is $12,250. The Loan balance at September 30, 2007, was $759,000.
On May 7, 2007, we amended our current loan agreement with the Bank. Under the terms of the fourth amendment, we entered into a term loan (the “Term Loan”) with the bank in the amount of $500,000 which is secured by our U.S. property, plant and equipment, as well as inventory and accounts receivable. Interest, which is a rate equal to the Bank’s Prime Rate (currently 8.25%), is due and payable monthly. The monthly principal and interest payments commenced on June 1, 2007, and will continue through May 1, 2012. The monthly principal payment is $8,333.33. The Term Loan balance at September 30, 2007, was $467,000.
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results
of Operations
In addition, the fourth amendment changed the existing covenant requiring the Company to maintain a positive net income after tax on a rolling four quarter basis to the following: “Beginning January 1, 2007, Borrower agrees that it will maintain a positive net income after taxes, on a consolidated basis, including foreign subsidiaries and properties and excluding only events resulting from required changes in GAAP accounting treatment of intangibles or similar events beyond the control of the Borrower, when determined for the following periods: (i) the three-month period ending March 31, 2007; (ii) the six-month period ending June 30, 2007; (iii) the nine-month period ending September 30, 2007, and (iv) the twelve-month period ending December 31, 2007, and as of each March 31, June 30, September 30, and December 31, thereafter, for the preceding twelve-month period ended on such date.” The effect of this amendment is to exclude the impact of the loss experienced by the Company in the fourth quarter of 2006 from the determination of the positive net income.
The Agreement contains covenants that, among other things, require the maintenance of financial ratios based on our consolidated results of operations. The Agreement also requires us to notify the Bank upon the occurrence of a “material adverse event”, which among other items, is considered to be an event that may adversely affect our consolidated financial condition, business, properties, operations, the Bank’s collateral or the Bank’s ability to enforce its rights under the Agreement.
As noted above, the Agreement contains covenants that, among other things, require maintenance of certain financial ratios based on the results of the consolidated operations. The covenants, which are calculated at the end of each quarter, are as follows:
As of and for the four quarters ended September 30, 2007, we were in compliance with all financial ratios contained in the Agreement and expect to be in compliance for a period of twelve-months beyond September 30, 2007.
Related Parties
On December 12, 2003, we entered into a loan and security agreement with Paulson Ranch, Ltd., which is owned by the Company’s Chairman of the Board, Bernard Paulson. Under the Agreement, Paulson Ranch made a loan to us in the amount $500,000 with a variable interest rate of 4% per annum above the “Wall Street Journal Prime Rate”. The loan proceeds were used for working capital. The Company paid the outstanding principal balance of $400,000 and accrued interest to Paulson Ranch, Ltd., on March 15, 2007.
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Netherlands Operations
On March 20, 2007, our subsidiary, TP&T, entered into a new short-term credit facility (“Credit Facility”) with Rabobank which replaced the existing Euro 650,000 short-term credit facility (dated April 2, 2004). Under the terms of the Credit Facility, TP&T’s line of credit increased from Euro 650,000 ($928,000) to Euro 1,100,000 ($1,570,000). The Credit Facility, which has a variable interest rate of Bank prime plus 2.8% (7.55% at September 30, 2007), will mature on December 31, 2009 and is secured by TP&T’s accounts receivable and inventory. At September 30, 2007, TP&T had utilized Euro 983,000 ($1,403,000) of its short-term credit facility.
On April 2, 2004, TP&T entered into a term loan with Rabobank in the amount of Euro 676,000. The proceeds of the term loan were used to reduce TP&T’s credit facility and reduce inter-company payables to the U.S. Operation. The term loan, which is secured by TP&T’s assets, will be repaid over a period of five years with a fixed interest rate until maturity of 5.5%. Monthly principal and interest payments commenced on July 1, 2004, and will continue through June 1, 2009. The monthly principal payment is Euro 11,266 ($16,083). The loan balance at September 30, 2007, was Euro 237,000 ($338,000). Under the terms of the Loan Agreement, the Company has guaranteed the term loan.
On July 7, 2004, TP&T entered into a mortgage loan (the “First Mortgage”) with Rabobank. The First Mortgage, in the amount of Euro 485,000, will be repaid over 25 years with interest fixed at 5.2% per year for the first four years. Thereafter, the rate will change to Rabobank prime plus 1.75%. TP&T utilized Euro 325,000 of the loan to finance the July 14, 2004, purchase of land and an office building, as well as to remodel the office building. The balance of the loan proceeds, Euro 160,000, was used for the expansion of TP&T’s existing building. Monthly principal and interest payments commenced on September 1, 2004, and will continue through July 1, 2029. The monthly principal payment is Euro 1,616 ($2,307). The loan balance at September 30, 2007 was Euro 425,000 ($607,000). The mortgage loan is secured by the land and office building purchased on July 7, 2004.
On January 3, 2005, TP&T entered into a second mortgage loan (the “Second Mortgage”) with Rabobank to fund the acquisition of a 10,000 square foot warehouse with a loading dock that is located adjacent to TP&T’s existing production facility. The Second Mortgage, in the amount of Euro 470,000, will be repaid over 25 years with interest fixed at 4.7% per year for the first five years. Thereafter, the rate will change to Rabobank prime plus 1.75%. Monthly principal and interest payments commenced on February 28, 2005 and will continue through January 31, 2030. The monthly principal payment is Euro 1,566 ($2,236). The mortgage is secured by the land and building purchased by TP&T on January 3, 2005. The loan balance at September 30, 2007 was Euro 421,000 ($602,000).
On July 19, 2005, TP&T entered into a new term loan with Rabobank to fund the completion of its building expansion. The loan, in the amount of Euro 500,000, will be repaid over 10 years with interest fixed at 6.1% per year for the first five years. Thereafter, the rate will change to Rabobank prime plus 1.75%. Monthly principal and interest payments commenced on August 31, 2005 and will continue through July 31, 2015. The monthly principal payment is Euro 4,167 ($5,949). The loan is secured by TP&T’s assets. The loan balance at September 30, 2007 was Euro 396,000 ($565,000).
TP&T’s loan agreements covering both the credit facility and the term loans include subjective acceleration clauses that allow Rabobank to accelerate payment if, in the judgment of the bank, there are adverse changes in our business. We believe that such subjective acceleration clauses are customary in the Netherlands for such borrowings. However, if demand is made by Rabobank, we may require additional debt or equity financing to meet our working capital and operational requirements, or if required, to refinance the demanded indebtedness.
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Malaysian Operations
On September 14, 2005, the Company’s subsidiary, TMM, amended its banking facility with HSBC Bank Malaysia Berhad (“HSBC”). The amendment increased the Bankers Acceptance from RM 500,000 ($148,000) to RM 3,780,000 ($1,117,000) and added a U.S. Dollar term loan (“USD Loan”) in the amount of $1,000,000 (or RM 3,780,000 Malaysian Ringgits, which ever is less). Funding on the USD Loan will represent 74% of the invoice amount that TMM utilizes in the upgrading of their plant and machinery. If the amount funded is less than $1,000,000 on October 31, 2007 the loan amount will be adjusted to what has been funded.
At September 30, 2007, TMM had drawn down $440,000 on the USD Loan. Monthly interest payments began in December 2005 based on an annual interest rate of 6.5%. Monthly principal payments are scheduled to begin on August 26, 2007 and will continue through June 30, 2010.
TMM renewed its banking facility with HSBC on October 30, 2006, for the purpose of extending the maturity date of the current facility from October 31, 2006, to October 31, 2007. The HSBC facility provides for an overdraft line of credit up to RM 500,000 ($148,000), a bank guarantee of RM 300,000 ($89,000) and an ECR up to RM 8,000,000 ($2,364,000). The ECR, a government supported financing arrangement specifically for exporters, is used by TMM for short-term financing of up to 180 days against customers’ and inter-company shipments.
On October 30, 2006, TMM renewed its banking facility with RHB Bank Berhad (“RHB”) for the purpose of extending the maturity date of the current facilities from October 31, 2006, to October 31, 2007. The RHB facility provides for an overdraft line of credit up to RM 1,000,000 ($295,000) and an ECR up to RM 9,300,000 ($2,748,000). The RHB facility was also amended to include the following:
The banking facilities with both HSBC and RHB bear an interest rate on the overdraft facilities at 1.25% over bank prime and the ECR facilities bear interest at 1.0% above the funding rate stipulated by the Export-Import Bank of Malaysia Berhad. At September 30, 2007, TMM was not utilizing their overdraft or their ECR facilities.
The borrowings under both the HSBC and the RHB short term credit facilities are subject to certain subjective acceleration covenants based on the judgment of the banks and a demand provision that provide that the banks may demand repayment at any time. We believe such a demand provision is customary in Malaysia for such facilities. The loan agreements are secured by TMM’s property, plant and equipment. The credit facilities prohibit TMM from paying dividends and the HSBC facility further prohibits loans to related parties without the prior consent of HSBC.
TOR Minerals International, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Off-Balance Sheet Arrangements and Contractual Obligations
No material changes have been made to the “Off-Balance Sheet Arrangements and Contractual Obligations” noted in the Company’s 2006 Annual Report on Form 10-K.
Quantitative and Qualitative Disclosures About Market Risk |
See the Company’s 2006 Annual Report on Form 10-K
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, management of the Company has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the date of the evaluation, the Company's disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls
During the period covered by this report, there were no significant changes in the Company's internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the period covered by this report that have materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting.
Part II - Other Information
Legal Proceedings |
The Company is involved in routine litigation incidental to its business. Management believes that the outcome of such litigation will not have a material adverse affect on its financial position, results of operations and cash flows.
Risk Factors |
No material changes have been made in the disclosure of risk factors for those set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Defaults Upon Senior Securities |
None.
Submission of Matters to a Vote of Security Holders |
None.
Other Information |
None.
Exhibits |
Exhibit 31.1 |
Certification of Chief
Executive Officer |
|
Exhibit 31.2 |
Certification of Chief
Financial Officer |
|
Exhibit 32.1 |
Certification of Chief
Executive Officer |
|
Exhibit 32.2 |
Certification of Chief
Financial Officer |
Signatures: |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|||
____________ |
||||
(Registrant) |
||||
Date: |
November 13, 2007 |
OLAF KARASCH |
||
Date: |
November 13, 2007 |
STEVEN PARKER |
||